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March 03, 2017

Construction industry poised for rapid digitization

The CG/LA Infrastructure Leadership Forum in Montreal has provided a fascinating glimpse into what is happening around the world in infrastructure from a technology, financing, and business model perspective. . From 50,000 feet the big item is that the construction industry may be at the tipping point with respect to digitization.

PPP

Probably the highlight of the event is the success of PPP projects, especially in Canada. About one quarter of major infrastructure projects in Canada are PPP. In the U.S. the PPP model works well in some jurisdictions, for example, the Port Authority of New New York and New Jersey. In some states PPP is illegal and even at the federal taxation level until recently there were tax regulations that hindered the adoption of the PPP model. The presentations made clear that there are multiple PPP models. Several projects in Latin America were looking at PPP alternatives that were better suited to their jurisdictions. A conference attendee from Nigeria was clearly very interested in which of the PPP models were appropriate in his country.

Investment in infrastructure

Big numbers were on virtually every speaker's lips. The Canadian Federal government intends to invest $180 billion over ten years in infrastructure, the Quebec government $87 billion, President Trump threw out $1 trillion over five years in a state of the union speech a few days ago, Boston Consulting Group has estimated that there is a spending gap of $1 trillion annually, and the ASCE estmates that US infrastructure requires an investment of $4 million just to make up for the lack of maintenance over the past decades. Some speakers made a convincing case that these estimates are overblown. Whatever the numbers there was a consensus that there is a very large need for investment in infrastructure.

But infrastructure, while among the top ten priorities for Americans, is not up there with jobs and the economy. The Boston Consulting Group estimates that there are 15.4 million jobs in the infrastructure industry. On average these are better paying than the average blue collar job. The BCG modeling suggests that $ 1 trillion invested in infrastructure could get this up to 19 to 20 million jobs. To get attention infrastructure has to be about jobs.

The good news is that there was a consensus that there is a lot of money looking for infrastructure projects. One speaker estimated ten times as much money as projects to invest in. The holdups appear to be:1) Permitting - Few are willing to commit money to projects that don't have the requisite permitting in place. In the U.S. that process requires on average 9.5 years, but can take up to 15 years.2) Social licence - These days it is not enough to simply get the state, federal, presidential, US Army Corps of Engineers and other regulatory permits. It is necessary to get a social licence which means actively seeking buyin from the community. For example, the Plains and Eastern Tennessee transmission line project has been supported by the Sierra Club and other environmental organizations as well as local landowners and other stakeholders. Sometimes opposition comes from unexpected sources. Clean Line's several big transmission projects have sometimes been filed against by the local utilities companies whose service territory the line crosses.3) Business case - Investors are looking for a low risk investment with a good return. That means that benefits to various stakeholders have to be identified and stakeholders brought into the project to spread the risk and reduce it for any one participant.

A lot of this money is private from domestic and international sources. Japan and Saudi Arabia were both mentioned as sources of money for infrastructure investment. Canadian pension funds are active in investing in infrastructure internationally. To attract private funding infrastructure projects will have to generate returns, and that will drive investment in technology to improve productivity.

U.S. infrastructure market

Another highlight of the conference was Dan Rule's presentation on the Trump Transition Team's recommendation for infrastructure development in the next four years, which I blogged about previously.

Interestingly what Trump decides to do with respect to infrastructure may not be all that important. In the U.S. the federal government is not by any measure the biggest player in the infrastructure market - it only represents about 10% of the market. The big player is local governments. Local government has enormous power to choose projects, raise money and borrow money. This local autonomy is baked into the Constitution. Local governments decide on infrastructure projects and then float (tax deductible) bond issues to finance them. The muni bond market is $3.2 trillion and is the second largest debt market. There is good news here as well. The majority of the bond issues at the local level to fund infrastructure projects are successful in raising the necessary money through rates.State governments are also big players in the infrastructure market. One speaker recommended to vendors and consultants looking for opportunities in the U.S. to look for municipalities who had recently successfully floated bond issues or states that had increased the gas tax or counties that has implemented a sales tax. In some states the state government and local governments are collaborating to fix all bridges in need of rehabilitation rather than inefficient one-offs by individual municipalities and counties.

Large infrastructure projects

There are some very innovative large infrastructure projects around the world that were profiled at the conference. I was very impressed that the long-haul transmission business appears to be coming to life in the U.S. This business is not being driven by the incumbent power utilities, but by new players like Clean Line. Geospatial technology underpins transmission line siting, transportation, and increasingly horizontal construction as drones, scanners, 3D visualization and other digital technology transforms the construction industry.

Technology

From a technology perspective just about every speaker referred to the lack of progress on productivity in the construction industry. Engineering and construction are second from the bottom on the IT adoption chart. But Wipro, Booz Allen Hamilton, Aconex, Jacobs, and other vendors and analyst McKinsey believe that the construction industry is poised for the digitization revolution. Vendors are investing heavily in technology including artificial intelligence, digital modeling such as BIM and full lifecycle BIM or BIM++ as one speaker referred to it, machine learning, drones, neural networks, virtual reality, big data, analytics, automation and hyperautomation.

GIS has been widely used by utilities for years for automated mapping/facilities management, back office records management, asset management, transmission line siting, and more recently for design and construction, energy conservation, vegetation management, mobile workforce management (MWFM), and outage management (OMS). Now, utilities are integrating GIS with automated meter infrastructure (AMI) and supervisory control and data acquisition (SCADA) systems. Intelligent design has crossed over from the office to the field in utilities, also enabled by the capabilities of GIS. Geospatial-related analytics (spatial analytics) is seen as one of the key aspects of success for electric utility operations in the smart grid era. Looking for patterns and correlations between different land, weather, terrain, assets, and other types of geodata will be increasingly important for utilities. Power-related analytics with geospatial components include network fault tracing, load flow analysis, Volt/VAR analysis, real-time disaster situational awareness, condition-based maintenance, and vegetation management.

As an example, PrecisionHawk is not only selling drone services but the geoanalytics to extract useful, actionable information. One of their targets is the construction industry and they intend to fit their solutions into existing workflows. For example, a drone can collect aerial imagery of a stockpile, and the software provided by PrecisionHawk enables the volume of the stockpile to be calculated from the imagery without the user having to know much about drones, imagery, meshes or algorithms for calculating stockpile volumes. PrecisionHawk also have an FAA permit for beyond-line-of-sight (BVLOS) drone flights. (I already blogged about the pilot flights that Xcel Energy also has an FAA permit for.) This suggests the next step will be drone data collection and geospatial analytical applications based on this data for linear construction projects.